Suit challenges how Golden NW Aluminum, Inc. used a windfall from resale of unused electricity

Bondholders have sued Golden Northwest Aluminum, Inc. over how the company used a windfall from reselling unused electricity when power prices skyrocketed this year.

BNY Western Trust Co., sued Golden Northwest - the parent company of Northwest Aluminum in The Dalles and Goldendale Aluminum - on Nov. 16 in federal court in New York.

BNY stated it was bringing the suit on behalf of all bondholders who purchased $150 million in bonds issued by Golden Northwest in December 1998. BNY is listed as the successor trustee for the bond contract.

The suit seeks to halt and reverse an arrangement reached by Brett Wilcox, owner of Golden Northwest Aluminum, and the Bonneville Power Administration in which the bulk of proceeds of re-sold power are earmarked for use in building new power plants to be owned by Wilcox.

The lawsuit says Wilcox all but stopped aluminum production at his two smelters, and sold the power the smelters would have used. That resold power, a valuable company asset which generated $285 million between December 2000 and Sept. 30, 2001, was "diverted" to a new company that is potentially beyond the reach of bondholders to collect on the debt, the lawsuit says.

That new company, owned by Wilcox and called Northwest Energy, is building the new power facilities.

The result was that Golden Northwest Aluminum was "stripped" of "significant assets" and left "on the verge of financial collapse," the lawsuit says.

The aluminum smelters and other related holdings serve as the security interest for the bonds, the suit says.

The new power company is not a subsidiary of Golden Northwest, the lawsuit says.

"In an attempt to exploit the recent developments in the energy markets, Mr. Wilcox engineered a plan that would allow him to abandon the former business of the company - aluminum production - and instead fund, with Company assets, a new enterprise devoted to the development and generation of electrical power," the lawsuit says.

The lawsuit repeatedly calls the transactions a "scheme" and contends, "what remains after the Scheme is a Company that is financially distressed and a shell of what it once was."

The suit contends the transactions by Wilcox are a breach of the bond contract and violate bondholders' rights.

A statement from Golden Northwest said, "We believe the bondholder allegations mischaracterize both the company's public disclosures ... and the company's power development efforts, which were properly approved and fully disclosed, have been widely publicized, and are in the best interests of the company and its various constituencies. We intend to obtain a favorable outcome of the suit, both through a vigorous defense and through efforts to resolve the suit on favorable terms."

The BPA had no comment on the lawsuit, spokesperson Aretha Hyman said, other than to say that "Golden Northwest Aluminum did what we agreed that they would do with revenue from resale of power: pay employees and invest in power resources that would help sustain plant operations while contributing to the region's power supply. We can't comment on what arrangements existed between the company and its bondholders."

The lawsuit frequently quotes public financial statements filed by Wilcox. In one statement, the lawsuit said, Wilcox said the transactions would make the power-hungry aluminum smelters self-reliant by building their own power supply.

But, the lawsuit says, Wilcox later scaled back his predictions, saying the smelters might still need to buy power elsewhere, and that the new power plants themselves are not assured of getting the money needed to start up.

The suit contends Wilcox made a "futile attempt" to "rubber stamp" the fairness of the transaction in public statements, but he "did not canvass the market or consider other potentially viable alternatives, such as making Northwest Energy a subsidiary of the Company, negotiating a better deal for the Company ... or other options, including the obtaining of any necessary creditor consensus."

The suit alleges Wilcox wrongly transferred a valuable asset in return for something much less valuable: "a speculative and unenforceable right to purchase electricity at some undefined 'cost' at some distant and unknown point in the future..."

The lawsuit says $25 million in remarketing proceeds rights were directly transferred to Northwest Energy, and as of Sept. 30, $17.5 million had already been paid.

The suit also says other resale rights were transferred, including: up to $200 million to the BPA, to serve as collateral to support the BPA's guaranty of any loans made by other lenders to Northwest Energy; the payment of approximately $100 million in resale transaction fees to the BPA; and a transfer to the BPA of the right to receive at least $159.7 million in re-sale proceeds into an escrow account for the benefit of the BPA and Northwest Energy.

The suit says that as of Sept. 30, 2001, $91.07 million had already been deposited into that escrow account and $62.197 million was used to purchase Northwest Energy bonds.

The suit says that by setting up the power re-sale funds to serve as loan collateral, the BPA and other lenders could be entitled to get those funds before bondholders would.

The suit contends the actions of Wilcox have hurt the company's credit ratings and the value of the bonds has plummeted, from $1,002 per bond in December 1998 to $445 as of Sept. 30, 2001.

The lawsuit asks the court to rule that Wilcox is in default on the bond contract, reverse the transactions and award bondholders damages.

The lawsuit contends Wilcox violated several clauses of the bond contract.

First, it claims Wilcox violated a clause that transactions with related companies of Golden Northwest must be "fair," and on no different terms than a deal that would be reached with an unrelated company.

The suit contends the deal reached between Golden Northwest and Northwest Energy was unfair to Golden Northwest, in that it transferred something highly valuable in exchange for something of considerably less value.

While Wilcox said the smelters would get power at "cost" from the power plants, the "cost" is not defined, the suit says. Also, because the power plant would be able to sell any excess power on the open market, at retail prices, it would have an opposing interest to that of the smelters - to sell as little as possible to the smelters so it could make more money on the open market.

Wilcox said in publicly disclosed financial papers that creditors of the new power plants may not even agree to sell at-cost power to the smelters, the suit says.

Second, the suit contends Wilcox violated a clause that the company generally cannot make loans or advances, except where it already owes money for normal business expenses.

Third, the suit contends violation of a clause that the company generally cannot incur debt or create liens on its assets.

Fourth, the suit contends that the bond contract requires any company assets sold must be for fair market value, and payment must be 75 percent cash or cash equivalent.

The suit contends the transfer of the company assets, in the form of the power resale proceeds, in exchange for the speculative right to buy power at a future date at an undetermined price violated that clause of the contract.

Fifth, the bond contract says the company must not stray from its "core business." It cites public filings by Wilcox in which he says the "development of power generation facilities is not now part of our core business..."

And finally, the lawsuit cites a provision in which the company must not pay dividends while it is in an "event of default." The bondholders are asking the court to rule that the company is in default, and the suit notes that Wilcox had dividends of $4.42 million declared on his common stock "in order for him to pay his income taxes."